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Is South Africa’s labour law killing entrepreneurship?

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This article also appeared in Finweek Magazine in their 20-Dec-2012 issue

In a recent talk about entrepreneurship, renowned South African entrepreneur, Herman Mashaba, spoke passionately about our labour laws stifling entrepreneurs in South Africa. As an entrepreneur, this is a subject very close to my heart. entrepreneur hands tied

To kindle entrepreneurial activity, we need a vibrant SMME sector. However, Herman painted a bleak picture about the decline of entrepreneurship in the townships. “In the past, when you went into the townships, things were buzzing. There were small businesses everywhere. Nowadays you don’t see that anymore. That entrepreneurial spirit is dying.”

Why? In Mashaba’s view, this is largely because of our suffocating labour laws. In South Africa it is too risky, difficult and costly for businesses to hire and fire people. Our dismissal requirements are expensive and inflexible, and small businesses cannot afford the high costs of making hiring mistakes. Together with uncompetitive minimum wages, these issues discourage businesses from bringing on more workers.

In Herman’s own business, he is reluctant to take on more people, preferring to keep his staff numbers down.

Big business echoes Herman’s view. Our labour laws mean employers must negotiate wages at an industry-wide level and make it incredibly hard for them to fire workers who don’t deliver. This puts the brakes on hiring, according to companies such as AngloGold Ashanti, Africa’s leading gold producer.

In order to scale a business from start-up to expansion phase and beyond, entrepreneurs need to bring on people. Not just any people. You need good people. The challenge is finding them. No interview process is fool-proof, and you have to sift through lots of fool’s gold to find the real precious metal. So if a new hire doesn’t perform, entrepreneurs need to be able to get rid of them easily, and to bring on new people who do deliver.

South Africa’s labour laws make it very difficult to do this. According to economist Chris Hart, “(Our) economy is not geared to creating jobs because the environment is too hostile for small business.” Measuring the competitiveness of our hiring and firing processes, the World Economic Forum’s 2011-2012 Global Competitiveness Report puts South Africa in a dismal 139th position out of 142 countries.

And so instead of entrepreneurship creating jobs and growing SA’s economy, we sit with a massive unemployment problem. Our official unemployment rate averaged 25% in 2012. According to Stats SA, we have almost 4.5m people without jobs. Of those, a staggering 73% are younger than 35. In practical terms, this means almost three quarters of our youth are unemployed! Government data indicates that a further 2.3m people are so demotivated that they’ve stopped looking for jobs.

South Africa’s all-powerful trade unions only add fuel to the fire. They represent the interests of employed workers (or at least they claim to, whether they actually do is another issue altogether). However, what is clear is that they don’t protect the interests of unemployed people. The trade unions push for higher minimum wages across entire industries such as mining and manufacturing. If businesses need to pay each worker more, they cannot afford to hire as many people. On the World Economic Forum’s measure of flexibility in determining wages, South Africa sits in 138th place out of 142 countries. Our Labour Relations Act of 1995, which encourages industry-wide wage agreements, has given the labour unions greater bargaining power and made it easier for their members to strike. Labour strikes only worsen the situation by causing businesses to lower production and lose out on revenue. The end result? More South Africans remain jobless.

Higher minimum wages in South Africa not only translate into higher unemployment, but they also make our workers less competitive worldwide. Based on 2012 figures in World Bank’s Doing Business study, the minimum monthly wage for a 19-year-old apprentice in South Africa is $622 (up from $543 in 2011), where our national jobless rate is 25%. Compare China, where the minimum wage is $204 (up from $183 in 2011) and unemployment sits at 4%. In India minimum wage is currently $30 a month (same as in 2011), with 4% jobless. Putting proudly South African and language barriers aside, if you were running a business, it doesn’t make financial sense to hire South Africans over workers in India or China. Not only are they cheaper, but it is also becoming easier to get access to Indian and Chinese virtual workers through global job sites like Elance.

And soon it may become even more difficult to get a job in South Africa. Under pressure by South Africa’s labour unions, the government is proposing changes to labour law that aim to increase job security for temporary workers. How do they plan to do this? By giving temporary staff the same rights as permanent employees, provided they have been in a job for over six months. However, this will drive up costs for retailers such as Pick n Pay, which will be forced to increase pay and give pension and medical benefits to these temporary workers. Higher labour costs mean businesses will hire fewer people, and unemployment will only get worse.

As entrepreneurs, we have the potential to create the jobs that our country so desperately needs to slash unemployment and build our economy. But we can only do this if SA government revises our labour laws to make it easier for businesses to hire good people and fire poor performers.

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Author: Colette Symanowitz

Managing Director of www.BeatingBullies.com and www.MBAconnect.net. Passionate about entrepreneurship, personal branding and networking. I also tweet under @mbaconnect_net and @Beating_Bullies

5 thoughts on “Is South Africa’s labour law killing entrepreneurship?

  1. I disagree with this form of generalization. Not all business is labour intensive. Entrepreneurship is not limited by labour but cost, labour is not the only cost.

    South Africa has it’s out unique background. The economy is still in the hands of the minority. Look at the profits made by the private sector in relation to the amount paid to employees, huge difference.

    Export companies make or lose revenue from the fluctuating exchange rates. This is not directly linked to labour input e.g. Sasol.

    The labour laws are on point until the economy is equitably distributed to all citizens.

    Chinese and Indian labour must be discouraged at all costs.

    • Thanks Lonwabo, you raise some good points. I agree that not all business is labour-intensive. However, all business requires labour. So even though labour isn’t the only cost, it is a significant cost of all businesses. A great example that one of our members Marga Hagens posted on MBAconnect.net was for a small business. In Marga’s words, “The new minimum wages in the agricultural sector will result in our small farm having to retrench one of the two workers we currently employ.” So realistically, SA’s current labour laws will mean fewer people are employed but paid more, and the vast majority will be unemployed. So equitable distribution of the economy won’t happen unless our labour laws improve dramatically.

      • We are living in a knowledge economy where knowledge is a key resource. If your key resource is skill, whichever level, then as an entrepreneur you have to model your business around the cost of your resource and the operating environment of your business, competition, legislation, etc.
        South Africa has it’s own dynamics, majority of citizens rely on their low level skills(farm laborers, gardeners,etc) to make ends meet. They don’t have a resource (e.g. land) to take to the market other than themselves. Must they be exploited? No.

        Farmers make about 15% profit on their produce and retailers up to 64%. Who should we blame here?

        If your true cost is labour, align it with your profits. if you are not making profit, you should not be in business.

        Lets not shift this problem to labour. If a few individuals share profit in an organization and others don’t, is if fair to blame labour laws. Business is structurally wrong to favor the entrepreneur. True entrepreneurs create jobs and pay their employees well rather as opposed to those who are there to enrich themselves.

        I cannot comment on your inability to select the right skills from the market. That is not a government problem. If you can’t select the right potato to sell as an entrepreneur, it’s your problem. No one will interview people for your business. Those are technicalities of running your business. Other businesses get the right skill they want. The argument has no weight on the labour laws.
        My argument is, once you are satisfied with your resource selection, take care of your resource. Use your profit to expand your business and employ more people while at it or share your profit with your employees if you don’t need more people.

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